Reinventing Manufacturing

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Reinventing Manufacturing Provide Access to Capital and Financial Incentives for Manufacturers Clustering and workforce initiatives can provide the long-term structural changes necessary to move advanced manufacturing in California forward. More immediately, the availability of capital plays a key role in a firm’s ability to grow, and financial incentives often can determine siting locations as manufacturers expand. At the national level, the federal Research and Experimentation Tax Credit provides $7 billion in tax incentives each year to companies that make investments in research. 35 This tax credit allows firms to generate a higher rate of return on their research programs and also boosts the total dollars invested in research and development. A New York University study estimated that a 10 percent reduction in the cost of R&D leads the average firm to increase its research intensity—the ratio of R&D spending to sales—by 11 percent. 36 While manufacturers have called for lower effective corporate tax rates at the federal level, 37 California tax policies have also played a role in manufacturers’ decisions on where to locate and invest. With an 8.84 percent state corporate tax rate, California has the 10th highest rate in the country. 38 Other states, such as Nevada, Washington, and Texas, do not tax corporate earnings. Aside from taxing earnings, many states tax real property, tangible personal property, and corporate net worth (i.e., franchise taxes); business purchases of equipment are also taxed in many jurisdictions via the state sales tax. Taken together, these tax burdens can be a determining factor in where a company decides to make new investments. One area for possible reform that could lower the absolute tax amount paid by manufacturers in California is the state’s tax on tangible personal property. Income-generating movable assets, such as machinery used in manufacturing, fall under the definition of tangible personal property. In California, this property is taxed at a rate of 1.22 percent; however, 12 states exempt new machinery and equipment from this tax to varying degrees. California’s 7.5 percent sales tax rate is also the highest in the nation, though the state has already taken steps to partially exempt manufacturing equipment from this tax. California Programs to Incentivize Manufacturing Within the State To assist manufacturers expanding their operations within the state or looking to relocate, the State of California has created a package of incentives. The California Competes Tax Credit is negotiated between GO-Biz and businesses wanting to come to California or grow within the state. Credit amounts depend on the number of jobs that will be created in California and the amount of investment by the business. Of the $151.1 million of tax credit available in fiscal year 2014– 2015, 25 percent was reserved for small businesses with sales less than $2 million. For each taxable year between 2014 and 2020, the New Employment Credit is available to a tax-paying business that hires a full-time employee. The work performed by the employee must occur within an economic development area designated by the state, based on employment and poverty levels. In order to qualify for the credit, the business must have a net increase in the total number of full-time employees in California. Eligible manufacturers can finance capital projects through Tax-Exempt Industrial Development Bonds, which are issued by a local authority—such as an economic development authority or joint powers authority—and are approved by the California Industrial Development Financing Advisory Commission. With a lower cost to borrow stemming from the tax-exempt status, manufacturers can use the bond proceeds to finance the acquisition and rehabilitation, or construction of manufacturing facilities. Like many other states, California provides a partial sales tax exemption for manufacturing equipment. The exemption, which is intended to retain and attract manufacturers, applies to purchases of capital equipment made from July 1, 2014 through June 30, 2022 and reduces California state sales tax by 4.1875 percent on up to $200 million of a manufacturer’s purchases. A company that takes advantage of the exemption could potentially save up to $8.375 million in sales taxes per year. Eligible purchases include basic manufacturing equipment as well as food processing and biotech R&D equipment. 60
Strengthening California’s Environment for Manufacturing Recommendations to Increase Access to Capital for Manufacturers in California Institute a special tax credit for venture capital investments in small enterprises that manufacture products within the state. California’s concentration of venture capital investment has contributed to its strength as an innovation hub for advanced technologies and services, especially in relationship to computing and healthcare. In 2014, California-based companies received 56 percent of the $48 billion of venture capital investment in the US. 39 However, the types of enterprises that venture capital generally funds are an imperfect fit with manufacturing, as sectors such as advanced materials and biotechnology require larger capital outlays and longer times to exit than are usually funded through the venture capital model. 40 To create a stronger market for investment in the state’s manufacturing base, especially small manufacturers, California could employ a tax credit for investments made in the sector. At least 21 states offer income and business tax credits for angel investments; 41 these credits range from 15 percent of the investment in Colorado to 100 percent in Hawaii. Some states (Arizona, Ohio, and Maine) offer higher credits for investing in businesses that are located in targeted locales or that operate within a specific sector (nanotechnology in Wisconsin). A similar strategy in California can be tailored to investments in small manufacturers that produce at least a specified percentage of their products within the state. Make manufacturers more aware of state-provided funding sources. California has been able to lower overall costs for manufacturing capital expenditures by providing Industrial Development Bonds for project sponsors. However, only seven manufacturers used this financing mechanism between 2012 and 2014, with $32.5 million issued. Historically, loan reporting requirements and lengthy approval processes have tended to lower manufacturers’ interest in applying for bond issuances. If the benefits of the program are marketed more aggressively through local economic development channels, a greater number of manufacturers will be encouraged to take advantage of low-cost capital when expanding or moving their operations. Support the creation of local facilities housing manufacturing equipment that can be used for product prototyping and as a way to help small manufacturers conserve resources and move their products more quickly to market. One of the key reasons that new product ideas fail to receive investments that would enable them to be manufactured at scale is the lack of a prototype. Prototyping can be costly for new companies that lack access to manufacturing tools, though organizations in California are beginning to provide these tools to entrepreneurs. For example, Prospect Silicon Valley, a nonprofit technology commercialization catalyst supported by the City of San Jose, assists emerging companies via its demonstration center, a $12 million, 23,000 square foot facility with industrial and lab space. There, companies are able to demonstrate new technological innovations in a real world setting, helping them bring their products to the market faster. 61
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Reinventing Manufacturing How the T
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Contents Executive Summary.........
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Executive Summary Technology is rev
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Executive Summary Manufacturing wag
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PART One Technology is revolutioniz
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Reinventing Manufacturing 1 Major D
Page 13 and 14: Major Drivers of Change Figure 2: I
Page 15 and 16: Major Drivers of Change Figure 4: M
Page 17 and 18: Major Drivers of Change Technologic
Page 19 and 20: Major Drivers of Change Automation
Page 21 and 22: and predictive analytics. By contin
Page 23 and 24: Major Drivers of Change The Interne
Page 25 and 26: Major Drivers of Change These trend
Page 27 and 28: Major Drivers of Change Motors are
Page 29 and 30: Reinventing Manufacturing 2 Califor
Page 31 and 32: California’s Shifting Landscape:
Page 39 and 40: California Manufacturing Highlights
Page 43 and 44: INSIGHT The Future of Making Things
Page 47 and 48: INSIGHT From Light Rail to Locomoti
Page 55 and 56: Reinventing Manufacturing 3 Strengt
Page 57 and 58: Strengthening California’s Enviro
Page 59 and 60: SPOTLIGHT CalCharge: Charging Batte
Page 63: Strengthening California’s Enviro
Page 71 and 72: PART Two Humboldt Del Norte Mendoci
Page 73 and 74: California Manufacturing Regional C
Page 93 and 94: Title of Current Report Section 89
Page 95 and 96: Appendix B: Methodology APPENDIX B
Page 97 and 98: Appendix C: California Manufacturin
Page 111: Appendix C: California Manufacturin
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Reinventing Manufacturing 28. Shih,
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Reinventing Manufacturing

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